DISH Holders Might Balk at Dilution in Sprint Deal, Says Pac Crest

By Tiernan Ray

Pacific Crest‘s Andy Hargreaves today reiterates a Sector Perform rating on shares of Dish Network (DISH), which yesterday announced its intention to acquire Sprint-Nextel (S) for $25.5 billion, in cash and stock, going head to head with Japan‘s Softbank, which already agreed to acquire Sprint back in October.

Dish shares today are up 51 cents, or 1.4%, at $37.28, while Sprint shares are up 7 cents, or 0.9%, at $7.13.

Writes Hargreaves, the deal would bring “significant” dilution to Dish shareholders, on the order of 18% to 83%, and the combined company “would have to execute superbly, since it would be a debt-laden, sub-scale company in a highly competitive industry.”

Hargreaves values the deal structure as follows,

We believe a combined DISH/Sprint would trade at 5.0x to 6.0x EV/EBITDA. Using current consensus estimates for 2013 EBITDA and pro forma net debt balances, we estimate the value of DISH shareholders’ equity in the new company would range from $2.9 billion to $14.0 billion. In order to avoid dilution in the first year, we estimate the combined company would have to realize $1.3 billion of cost synergies and trade at 6.5x EV/EBITDA. We believe this multiple would be very difficult to achieve since the company would still be significantly under-scale relative to AT&T (T) and Verizon Communications (VZ), both covered by Pacific Crest analyst Michael Bowen), and would carry a significant debt burden of approximately of nearly 4.0x net debt to EBITDA.

Hargreaves also thinks Sprint investors might prefer the Softbank deal given the high level of debt in the Dish offer:

DISH’s offer to Sprint’s shareholders provides more initial cash, but less equity in the postmerger company under most valuation scenarios due to the significant debt issuance that would be necessary to complete the deal. The heavy debt load the post-merger company would have under the DISH proposal could also limit network capital expenditures, which would be a significant disadvantage versus AT&T and Verizon, in our view. Further, we expect Sprint management to push for the SoftBank agreement, since much of the Sprint executive team could be synergized in a DISH merger.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.